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No Windfall For Government From Undeposited Old Notes, Says RBI Chief Urjit Patel

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No Windfall For Government From Undeposited Old Notes, Says RBI Chief Urjit Patel

Urjit Patel said decision to remove old bank notes from the system was not taken in haste.


Highlights

  1. Dr Patel said banned notes still carry the liability of RBI
  2. He debunked speculation the government will get special dividend
  3. Economists said RBI could keep the money in special reserve
Urjit Patel, Reserve Bank of India Governor, on Wednesday debunked speculation that the central bank will pay a big dividend to the government in terms of old notes that are not deposited into the banking system.

The speculation has been based on the premise that the RBI's liability from notes that do not return to the banking system will be extinguished. And that it could transfer the benefit from that to the government.

Dr Patel however said today that even if the banned notes that do not return are taken out of circulation, "they still carry the liability of the RBI as long as only the legal tender characteristic status is withdrawn."

"Actually, the withdrawal of legal tender characteristic status does not extinguish any of the RBI's balance sheet and therefore there is no implication on the balance sheet as of now. So that question does not arise as of now - not just by withdrawal of legal tender character (of notes)," Dr Patel said at a press conference after RBI kept the repo rate or key lending rate unchanged today.
Madan Sabnavis, chief economist at CARE Ratings, said this basically means that instead of the RBI printing new money in place of the currency not returned and transferring that amount to the government, the central bank could keep it as special reserve to meet a possible future liability. "The notes will be on the RBI balance sheet without the status of legal tender and more likely will reside in the reserves of the central bank," he said.

A deadline for depositing 500 and 1000 notes, banned by the government last month in an attempt to unearth black or untaxed money, ends on December 30.

The RBI today disclosed that banks have so far received roughly Rs 11.5 lakh crore in banned notes as deposits. When the government withdrew legal tender status last month from 500 and 1000 rupee notes, it removed 86 per cent or Rs 15.5 lakh crore of the currency in circulation.

The Economic Research Department of SBI in a note last week estimated that Rs 1.5 lakh crore of old notes might not be deposited in the banking system.

The RBI chief today said the decision to remove old Rs 500 and Rs 1,000 bank notes from the system was not taken in haste. There had to be a high level of secrecy surrounding this decision, he said.


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